Transcription
In this video, I'm going to walk you through seven powerful tax strategies that many retirees underutilize. And when they're applied correctly, they can dramatically increase the amount of wealth that you actually keep in retirement.
You know, what I've learned after years of working with retirees is this. Many people don't struggle in retirement because they didn't save enough. That's not always the case, right? They struggle because once they stop working, they lose control of when and how their money is taxed.
Now, these approaches don't require taking more market risk. They don't rely on beating the market, but they require better timing and better coordination of decisions that already exist inside of a typical retirement plan. And that's why the retiree who uses these strategies often they don't just feel more confident. and they end up keeping significantly more of what they've worked for their entire lives to build up.
So today, I'm going to break down all seven strategies and show you why in retirement, timing often matters just as much as investing when it comes to preserving and growing your wealth. So, let's get right into it.
So, the first strategy is something that we'll call intentional Roth bracket filling. Not the greatest title, but that's what that's what we'll call it. So, intentional bracket filling simply means this. Each year, you convert just enough from your traditional IRA to a Roth IRA to fully use the tax bracket that you're already in without spilling into the next one. So, you're not trying to convert everything. You're not guessing, but you're very deliberately filling the lower brackets, typically the 12% or 22% bracket, and then stopping.
And the timing of this is important. This strategy works best before social security starts and before required minimum distributions kick in and begin stacking income on top of everything else. Because what we see all the time is this. Most retirees fall into one of two extremes. They either don't convert anything at all because they're afraid of paying taxes or they convert too much in one year and they accidentally put themselves in a much higher tax brackets than they needed to be in. So intentional bracket filling lives right in the middle. It's controlled. It's measured. And it's something that you can do year after year.
So why does this work so well? Well, because taxes in retirement are all about when income shows up, not just how much you have. So, if you can move money out of a traditional IRA at 12% or maybe even as high as 22% today instead of being forced to take it out later at 24%, 32% or higher once the RMDs and social security are stacking, well, then you just permanently lowered the lifetime tax cost of that money. And this is where the retirement low income window that we talk about on the channel a lot becomes really valuable. So for many people, the years between retiring and starting Social Security, those are the lowest tax years that they're ever going to have as adults. No paycheck, no RMDs yet, more control over how much income shows up on that tax return. And when this is done consistently year after year, we often see something that looks dramatic, right? It's very common for this approach to save somebody between $100,000 to maybe $300,000 or more in lifetime taxes compared to waiting and reacting once the required minimum distributions begin. Not because of better investments, but because of better timing. And that's the theme that you're going to hear repeated throughout this video. Bracket timing is strategy number one.
Strategy number two is something that I see a lot of people overlook, and that's got to do with capital gains harvesting. Capital gains harvesting is the intentional sale of your investments in a taxable account. So, not an IRA, during the years when your tax rate on those gains are going to be very low or maybe even zero. And this is where retirement creates an opportunity that simply doesn't exist during your working years. So, when you're no longer earning a paycheck, your taxable income often drops significantly, and that can place you into the 0% or the 15% long-term capital gains bracket, sometimes without even realizing it. Capital gains harvesting means that you sell something on purpose during those years. Not because you need the money and not because you're changing your investment strategy, but because selling allows you to reset the cost basis of those investments at little or no tax cost. That higher cost basis then reduces future taxes when those dollars are eventually spent.
So one other practical uses that we see people do is that when they maybe they want to buy a car in a few years. So, what we'll do is we'll sometimes take advantage of that lower tax impact by harvesting some money earlier uh maybe a few years early before the purchase and that saves them from popping up into a higher tax bracket later. But what we see most often is the opposite behavior. Like many people, they avoid selling from those taxable accounts altogether because they've really been conditioned to think that any tax is bad. But in retirement, avoiding taxes entirely, you know, it really just can create more taxes later.
So why does this strategy matter so much? Because the tax code gives retirees a window where capital gains can be taxed at low, maybe even 0%. So for single filers, that 0% bracket applies when taxable income stays roughly below $49,000. And for married couples that are filing jointly, it applies uh right about right around $98,000. And many retirees, especially in the early years before social security and RMDs, they fall right into that range. So when you intentionally sell those appreciated investments inside that window, you lock in gains at a 0% tax rate. So that's not a deferral. That's more of like a permanent tax savings. And over time that strategy quietly can transform a taxable account into something much more powerful. It becomes a flexible taxefficient income source often producing cash flow that's far lower at t far lower tax rates than uh people maybe ever had even when they were employed.
So we regularly see retirees who spent decades paying higher marginal tax rates suddenly find themselves in this remarkably low tax situation. Not because they took on more risk or did something, you know, spooky or magical, but just because they learned, you know, when selling actually works in their favor. And once again, this isn't about gaming the system. It's about understanding the rules and using the lowinccome retirement years to your advantage. So, capital gains harvesting. It's powerful.
But strategy number three, this next one is where things really start to come together because now we're coordinating multiple income sources instead of looking at each one in isolation. So strategy number three is delay social security while drawing down the IAS. So this strategy is about sequencing income the right way. So instead of claiming social security as soon as it's available, many retirees they're better served by delaying the benefits often up until age 70 while using their IRA to fund those early years of retirement. And here's why that works. Every year you delay social security beyond your full retirement age, your benefit grows by about 8% per year. So by age 70, that's roughly 24 to 32% higher inflation adjusted income coming in for life.
Now at the same time drawing down your your IRA, it reduces the balance before required minimum distributions begin. So that means smaller RMDs, lower future taxes, and fewer surprises in your 70s and beyond. Now, when this is coordinated properly, you often end up with higher lifetime income and lower lifetime taxes.
So, why don't more retirees do this? Two reasons. First, after decades of being told not to touch their retirement accounts, using an IRA early, it feels uncomfortable, even when it's intentional and planned. And second, many people claim social security early because it feels safer. But when you zoom out, claiming early and leaving your IAS untouched often creates unnecessary tax pressure. So you want to know if that's going to be a problem for you or not. Proper coordination does the opposite. You use the years when you have the most tax control and to draw from the IAS intentionally while allowing social security, the most valuable guaranteed income source that retirees have to grow as large as possible. Once again, this isn't about risk. It's about timing and making your income sources work together.
So, now you've seen the first three strategies. If you want help building your dream retirement as a whole and you'd like to see the way that we help people to figure this out, click the link below in the description and you can watch a free training I put together where I'm going to show you how you can optimize your plan. So, be sure to check that out.
And that brings me to strategy number four, which is Irma management. Irma stands for income related monthly adjustment amount. And in plain English, it's a Medicare premium searchcharge based on how much income shows up on your tax return. So when your income crosses certain thresholds, Medicare doesn't just tax you more, it charges you more every single month for parts B and D of Medicare. What makes Irma especially frustrating is how it works. These aren't gradual increases, they're cliffs. So if you go $1 over the threshold and your premiums will end up jumping for the entire year. And we see retirees fall into this search charge all the time. Not because they're spending more, but because their income shows up in the wrong year because of poor withdrawal coordination.
So what income level triggers Irma? Well, for individuals, the first search charge starts roughly at $109,000 of income. And for married couples, it's about double that. And every threshold that you cross after that can add anywhere from $1,000 to $3,000 per person per year to your Medicare costs. So that means a married couple can easily see premiums jump by several thousand annually just by crossing a line that they didn't even realize existed. So Irma management is the intentional process of keeping your income below those search charge thresholds whenever possible. So that might mean adjusting how much you convert to Roth or changing where income is sourced from a given year or simply coordinating withdrawals more carefully. And when this is done right, it can save retirees thousands of dollars every year without changing their lifestyle at all. And once again, the people who pay the most Irma are rarely the ones with the most income. They're the ones where that income just was not planned.
So strategic income management, it can help keep things on the right side of those cliffs and it prevents Medicare from quietly becoming one of the largest taxes in retirement. So here's an image actually of how we help our clients to stay on the right side of those clips or in this case it's better to say on the left side of those clips. So the dotted line is the exact spot where income for this client would cross over. So they have about $21,000 of income before that were to happen. Any more and then they would cross over that line and they would hit Irma. So the other arrow shows uh that they could have another approximately $50,000ish dollar in long-term capital gains before they hit that 3.8% net investment income tax. And just like in this image, you want to have some way of looking at it for yourself so you can know where you stand each year.
So strategy number five takes that same idea of coordination and it applies it inside of a married couple's plan. So strategy number five is spousal Roth consideration. So in many households one spouse holds a much larger pre-tax IRA or 401k than the other. So that imbalance it creates a very specific planning issue later in retirement. So with this strategy, Roth conversions are sourced intentionally from the spouse who holds the larger pre-tax balance. So the goal is to shrink the account that'll create the largest forced income problem down the road. And by prioritizing conversions from the larger IRA, you reduce those future required minimum distributions and you preserve tax control in the years when flexibility matters most.
So, why does this matter so much for married couples? Well, one account is often going to create the most tax burden down the road because of age difference and the amount of money in that account. So, when one spouse passes away, the surviving spouse shifts from being married filing jointly to single filing status. And the tax brackets, they get roughly cut in half, but the IRA balance doesn't. So if most of that pre-tax money sits in one spouse's account, well, the surviving spouse can be pushed into a much higher tax bracket without very much warning. So spousal Roth cons consideration really can help to prevent that. So by intentionally converting more from the largest IRA with while both spouses are alive and while the joint tax brackets are still available, you end up reducing those future RMDs. you lower that survivor tax pressure and you create more flexibility later on.
So we we we end up seeing this show up in a few common ways. So for example, a couple where maybe one spouse has like $1.8 million in an IRA and the other has very little pre-tax money or maybe a situation where one spouse spent years in a pension or a government plan while the other one accumulated most of their money in like a 401k. In those cases, targeted Roth conversions from the larger account can materially improve the tax outcomes for people. Lower required minimum distributions, fewer Irma surprises, and more control over the income for the surviving spouse. So once again, this isn't about aggressive tax moves. It's about recognizing where the real risk lives and addressing it before it becomes a problem.
Now, before we get into this next strategy, I want to acknowledge something that we hear all the time. So, many people tell us, you know, I'm not overly concerned about the taxes that my kids are going to pay after I'm gone. Like, and I get it. Like, and I don't disagree, right? The first priority is for you to support your lifestyle and your income so that your children don't have to take care of you. I get that. But we also hear something else quite often. And a lot of retirees do care about this. They don't want unnecessary taxes quietly eroding what they leave behind, especially when there may be some opportunities to reduce that burden without changing their lifestyle at all. And for those families, this next strategy can be incredibly impactful.
Strategy number six is inherited IRA compression planning. We'll call it compression planning. I've never called it that before, but for this video, we will. And it's really about reducing the tax burden that your children or other beneficiaries are going to face when they inherit retirement accounts. Now, under current rules, most non-spouse beneficiaries are required to empty an inherited IRA within 10 years. That sounds manageable on paper, but in practice, it often creates a significant tax challenge for people because the inherited withdrawals typically land right on top of a child's working income, often during their peak earning years. And that can push large portions of inherited IRA distributions into the 32% or even the 37% tax brackets.
What this strategy does is it shifts who pays the tax and when. So instead of your children being forced to recognize large amounts of income at high tax rates, you intentionally convert portions of your IRA to Roth while you're alive. Often during years when your tax rate is much lower because leaving a large traditional IRA behind can really quietly turn into a tax bomb for the next generation. So, for example, leaving a a $1 million traditional IRA to working age children, it can easily result in a large portion of that money being taxed at the highest marginal rates. So, if you compare that to converting $500,000 of IRA during retirement at 22% or 24%, well, that single decision can save the family hundreds of thousands of dollars in cumulative taxes. Well, you're also giving your children some more flexibility in how and when they use the money. And this is where the retirement tax planning and estate planning kind of intersect. You're not just optimizing for your own income, you're shaping the after tax outcome of what you end up leaving behind.
So, let's go over one more strategy and then I'm going to show you exactly how to turn all this into a retirement plan that you can actually use. Strategy number seven is tax diversification. So tax diversification is just the intentional process of building retirement income across different tax buckets. Tax deferred, taxable, and tax-free. You've probably heard that before. The goal isn't to guess which account type would be the best in the future, right? It's to make sure no single tax outcome can derail your plan no matter what happens. So when your money is spread across these different buckets, you gain the ability to choose where income comes from each year based on the tax environment at the time. And that flexibility, it's incredibly valuable in retirement.
And what we see far too often is the opposite. Many retirees, they've done an excellent job saving, but almost all that money sits in one type of account, usually tax deferred. the 401k and this creates concentration risk, not investment concentration risk, but tax concentration risk. So why is this an important strategy? Because tax laws change and no one, not Congress, not CPAs, not financial planners can reliably predict what tax rates are going to look like 20 years from now. So if your entire retirement income depends on one type of taxation, your plan becomes fragile. But when you have multiple income sources across different tax treatments, you gain once again flexibility and options. So you can adjust withdrawals, you can manage brackets, you can respond to law changes without blowing up your lifestyle. And that's the real power of tax diversification. Diversification isn't just about investments. It's all about flexibility.
So when you step back and you look at all seven of these strategies, they all have one thing in common. None of them require riskier investments. None of them rely on market timing. Every one of them comes really down to better timing. When you withdraw, when you convert, and when income shows up for you when you're retired. The key realization is this. You you can't control market returns, but you can control your tax timing. And the retirees who do better often didn't do anything crazy or exotic. They just planned for their taxes instead of reacting to them.
So, if you're watching this and you're thinking, "Okay, how does this actually apply to me?" We put together a free training that walks you through how we help people to use these strategies inside of a real retirement plan. So, it'll help you to see which timing decisions actually matter for your situations and which ones don't. So, if you want to check that out, just click the link below in the description and you can take a look at it.